Reforms, low deficit necessary to sustain high growth: PMEAC

New Delhi: Making a case for raising diesel prices and introducing more reforms, Prime Minister's Economic Advisory panel Sunday said that containing fiscal deficit is necessary to sustain high growth in the medium term.

"The process of fiscal consolidation is important from the point of view of sustaining high growth over the medium term. We really need to have a clear programme for containing subsidies.

"Therefore, the need for adjusting the diesel prices or the petroleum prices in line with what is happening to the crude prices in the international market has become necessary," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan told PTI in an interview.

He suggested that the government should rationalise the subsidies with a view to preventing wastage and helping needy.

"Priorities will have to be laid down by the government in terms of the type of subsidy which is considered to be most important... Then the other subsidies will have to be reduced so as to ensure that overall subsidy is within the limits of what is considered to be prudent," he said.

The government has pegged its outgo on food, fuel and fertiliser subsidies in the 2012-13 fiscal at over Rs 1.79 lakh crore, lower than Rs 2.08 lakh crore spent last fiscal.

Finance Minister P Chidambaram had said that the subsidy bill in the current financial year is expected to rise to 2.4 percent of the GDP from 1.9 percent estimated in the Budget.

"We need a long term plan to bring down the subsidies as a proportion of GDP. At the same time we also need to ensure that tax-GDP ratio also goes up. Therefore the process of fiscal consolidation should be such as to ensure that over the next 2-3 years, we get back to the (fiscal deficit of) 3 percent of GDP," Rangarajan said.

"Reforms need to be introduced in order to improve the productivity of the system wherever competition is lacking, we need to inject competition in those areas," he added. Chidambaram, after taking charge of the Finance Ministry in August, has undertaken a host of reform initiatives to boost investment flow. While diesel prices were hiked by over Rs 5 a litre, foreign investment norms were relaxed for retail, insurance, pension, information and broadcasting sectors.

India is battling worries of high fiscal deficit and declining growth momentum. While the budgeted fiscal deficit for the current fiscal was 5.1 percent of GDP, there were fears that higher subsidy outgo and lower buoyancy in revenue realisation would push the figure higher than 6 percent.

However, the Finance Ministry believes that the recent reforms initiatives would help to limit the fiscal deficit at 5.3 percent in the current fiscal.

Economic growth that slipped to a nine-year low of 6.5 percent in 2011-12 fiscal and PMEAC expects that the GDP growth in the current fiscal would be somewhere around 6 percent.